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This article was originally published in March-April 1994 and was republished in July-August 2008 as an HBR Classic. This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading.

In exemplary service organizations, executives understand that they need to put customers and frontline workers at the center of their focus. Those managers heed the factors that drive profitability in this service paradigm: investment in people, technology that supports frontline workers, revamped recruiting and training practices, and compensation linked to performance. They also express a vision of leadership in somewhat unconventional terms, referring to an organization's "patina of spirituality" and the "importance of the mundane." In this article, Heskett, Jones, Loveman, Sasser, and Schlesinger take a close look at the links in the service-profit chain, which puts hard values on soft measures so that managers can calibrate the impact of employee satisfaction, loyalty, and productivity on the value of products and services delivered. Managers can then use this information to build customer satisfaction and loyalty and assess the corresponding impact on profitability and growth. Describing the links in the service-profit chain, the authors explain that profit and growth are stimulated by customer loyalty; loyalty is a direct result of customer satisfaction; satisfaction is largely influenced by the value of services provided to customers; value is created by satisfied, loyal, and productive employees; and employee satisfaction, in turn, results from high-quality support services and policies that enable employees to deliver results to customers. By completing the authors' service-profit chain audit, companies can determine not only what drives their profit but how they can sustain it in the long term.

learning objective:

To understand the causal relationships among employee satisfaction, customer satisfaction, and profitability.

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This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading.

Harrah's Entertainment may not offer the most dazzling casinos in the business, but it is the most profitable gaming company in the United States. Since 1998, Harrah's has recorded 16 straight quarters of same-store revenue growth. It boasts the most devoted clientele in the casino industry, a business notorious for fickle customers. In this article, Harrah's Entertainment CEO and former Harvard Business School Professor Gary Loveman explains how his company has trumped its competitors by mining customer data, running experiments using customer information, and using the findings to develop and implement marketing strategies that keep customers coming back for more. Harrah's identified its best customers--who were not typical high rollers--and taught them to respond to the casino's marketing efforts in a way that added to their individual value. The company's customer preference data were collected through its Total Rewards incentive program; in addition, it used decision-science-based analytical tools and database marketing. This deep data mining has succeeded because Harrah's has simultaneously maintained its focus on satisfying its customers. Loveman outlines the specific strategies and employee-performance measures that Harrah's uses to nurture customer loyalty across its 26 casinos.

learning objective:

To see how companies can enhance customer loyalty and profitability by gathering data to better understand and appeal to customers' interests.

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In an effort to improve its global distribution system and thus enhance customer service in its shops around the world, Laura Ashley entered into a path-breaking strategic alliance with Federal Express Business Logistics Services. Under the terms of a loosely structured partnership, Federal Express essentially takes over the warehouse and distribution activities formerly handled by Laura Ashley. The alliance is path breaking due to its largely informal structure, based more on trust and mutual benefit than on complicated rules and measures.

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Li & Fung, one of the largest export trading companies in Asia, works primarily as an agent to connect U.S. and European manufacturers and retailers of nondurable, mass-market consumer goods with suppliers located all over East Asia who manufacture products according customer designs. Li & Fung's network of 2,000 suppliers in over a dozen countries is one of its most important competitive assets. This network consists of relationships with suppliers and knowledge of their capabilities and strengths. The network provides a number of benefits to customers, the most important being a wide variety of manufacturing options that differ by price, quality, and delivery time. Li & Fung's trading operations are organized into largely-independent, customer-focused divisions aided by regional branch offices. Its internal structure and incentives (especially compensation) are designed to motivate staff to customize service to each customer and to use the entire network to place each customer order with the supplier that most closely fits customer requirements. This design is especially important because of trading's low margins.

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In 1993, Booz.Allen & Hamilton forsook its previous, highly local organizational structure. It was motivated by a desire to serve multinational clients more effectively and to provide greater value to clients with more localized business by collecting best practices from around the world. Following a plan entitled Vision 2000, the firm created unified staffing pools based on industry and functional (strategy, operations, or information technology) expertise, within each of the three large regions, Atlantic (containing Europe and N. America), Asia-Pacific-Japan, and Latin America. In staffing each client engagement, partners considered all available staff within their regions attempting to provide the best consultants for the project, regardless of where they were located. The firm also redesigned compensation and evaluation methods, segmentation strategy, and staff development programs to fit its more integrated service delivery system. New systems and programs for sharing intellectual capital between consultants increased the firm's ability to provide value.

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Shows students how a custom software programming company takes advantage of differences between the United States and India in the cost of skilled labor (software engineers) to give its customers rare expertise and lower prices. Asks students to examine the company from its customers' point of view. HCL America offers customers three ways to purchase its services. The company can send its engineers to work on customers' premises on a temporary basis; do programming projects at its U.S. facilities, or send work to its "software factories" in India. A range of factors, including cost, determine which of these methods is best for a particular customer's project. Customers who send work to India often save 50% off the costs of doing the work in the United States. The decision point presents a potential customer, Sateesh Lele, who must decide whether to hire HCL America or a competitor, or use his own staff, for a particular project. If he hires HCL America, he must decide between three methods of work--on-site, in the United States, or in India.

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Dr. Prathap Reddy has created India's first corporate hospital, Apollo Hospitals of Madras. The hospital is managed according to an integrated philosophy of customer service and support to employees. A new hospital, in the city of Hyderabad, has not performed as well, however. Futhermore, the company is considering widely franchising the Apollo brand name, and establishing India's first health maintenance organization. Main subjects for analysis and discussion include: the connections between Apollo's management philosophy and its success in Madras, the reasons for Hyderabad's less impressive performance, and the merits of franchising and establishing the HMO given Apollo's expertise and conditions in India.

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The Indian Hospitals Corp. (IHC), a branch of Apollo Hospitals Group, is considering building a hospital and primary-care medical center in Colombo, the capital of Sri-Lanka, a small island off the southern coast of India. This case describes economic, social, and political conditions in Sri Lanka, particularly in and around Colombo, and the proposed project. There are both promising signs and potential problems.

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In January 1990, with inflation at 50%, the newly democratic Polish government introduced a draconian plan for a market economy. Most observers expected the Balcerowicz Plan, sometimes referred to as shock therapy, to spur reform through the restructuring of large state enterprises. When it failed to do so, they criticized it. But the plan succeeded in encouraging entrepreneurship, which now appears to be the main force driving economic reform in Poland. It was as if the Polish economy started over in January 1990. The central mechanism for the reallocation of labor and capital from state to private activity has enabled the growth of hundreds of thousands of private businesses. The authors argue that, although state enterprises have proved too unwieldy for rapid change, the Balcerowicz Plan has not failed. If anything, it could have gone further to stabilize inflation and help private enterprise.

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Describes the challenges facing a cellular telephone company in Mexico as it positions itself in the explosive cellular market and prepares to become a full-service telecommunications provider. Faced with declining market share, revenues per subscriber, and operating income, IUSACELL attempts to understand the economics of its customers and define its customer acquisition and retention strategies.

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